Power Shifts

Asia, powered by China, will provide economic leadership over the coming decades. Puru Saxena asserts that America’s days as the undisputed global leader are now numbered…

POWER SHIFTS

Unfortunately for the United States, history has never been kind to empires. They rise from the ashes, flourish and eventually decay. The past is dotted with glorious states, which ultimately faced the inevitable – the eventual decline! The 16th century belonged to the Spanish, the 19th century was dominated by the British and the 20th century saw the growth of America. So, who will take charge of the 21st century?

I am of the opinion that China will dominate our planet in the future. You may think I am crazy. But, if someone had told you in 1900 that the United States would replace Britain as the world leader in the 20th century, you would have pronounced him crazy too! So why am I so sure that the dragon will rule?

Remember, the People’s Republic of China is a massive market with 1.3 billion people. When the Chinese leaders unleashed capitalism 20 years ago, they changed our world forever. The Chinese economy has been gradually opening its doors and the effects are being felt today in several sectors. The most profound impact has been felt in the commodities arena. China is in the early stages of its industrialization and per-capita consumption is still depressed. Yet, China has already replaced the United States as the largest consumer nation in the world! China is now the largest consumer of copper, zinc, tin, rubber, raw wool, cotton, coal and major oil seeds. Furthermore, it is already the second largest consumer of oil (despite a ridiculously low per-capita consumption of 1.7 barrels when compared to 25 barrels in the U.S.!), aluminum, nickel and lead.

The point I am making is that China’s hunger for raw materials is going to increase in the future. As more and more jobs are transferred to Asia, the standard of living will rise. Wealthier people consume more things – period. Multiply any small increases in consumption by the 1.3 billion Chinese and you get a gigantic figure! This thought must have businesses dreaming all around the world!

The Coming Chinese Empire: Some Statistics

China is now the 7th largest economy in the world and worth US $1.4 trillion dollars. However, adjusted for differences in purchasing power, the Chinese economy is already the 2nd largest and over 60% of the size of the U.S. economy.

What will happen to domestic demand (and commodity prices) when the 371.6 million Chinese households start consuming more? You don’t have to be a rocket-scientist to figure out that the price of raw materials will go through the roof!

Modern China boasts two major cities – Shanghai and Beijing. Over the coming years, I suspect another 15-20 major cities will spring up all over China. Already, there is an exodus from rural areas towards urban centers and these ambitious people will need housing and employment. If America can boast of several major cities (New York, San Francisco, Los Angeles, Washington DC, Houston etc.) then why can’t China build at least the same number? In my view, it is inevitable that in a few years from now, Wuhan, Tianjin and Shenzhen will one day light up the night sky as major American cities do today. I want you to consider how much steel, copper, tin, lead and energy will be used to build these cities.

The Coming Chinese Empire: What About India?

In addition to this, what about China’s neighbor, the second most populated nation in the world? India. It is home to 1.1 billion people and has 199.4 million households. India, with a GDP of US$600 billion comes in as the 12th biggest economy in the world. But, adjusted for differences in purchasing power, it is already the 4th largest economy in the world after the United States, China and Japan!

Today, India has 34 color televisions per 100 households, 4.6 telephone lines per 100 people, 2.5 mobile phone users per 100 people, 0.7 computers per 100 people and 0.3 Internet hosts per 1,000 people! In summary, India’s per-capita consumption is amongst the lowest in the world with the capability of becoming the largest. Demand can only go one way from here – up!

Still not convinced? Then, consider the following statistics –

India has 6 cars per thousand people and China’s number comes in at a shockingly low 6.7 cars per thousand people. Compare these figures with the developed nations –

Even Cambodia has 312 cars per thousand people! I don’t know about you, but I am convinced that India and China’s car ownership won’t remain so low forever. It’s no wonder that car manufacturers all over the world are drooling at the future! Oil demand is another story altogether. Those who believe that this is just a temporary spike in prices are living in a dream world! In the real world, the millions of new cars, which the Chinese and Indians acquire, will be powered by petrol. In the real world, unless someone finds a lot more oil and finds it quickly, petrol prices will continue to defy gravity for the years to come.

Over the past 200 years, commodities had five secular bull-markets between the following periods –

The shortest bull-market lasted 15 years whilst the biggest commodity boom went on for a monstrous 40 years! The current bull-market is only 4-5 years old. If history is any guide, the current commodity bull still has a long way to go.

Regards,

Puru Saxenafor The Daily Reckoning

October 26, 2005

P.S. As I have explained above, the emerging economies of Asia will require immense quantities of “things” over the coming years. Investors must take positions in tangibles for the long-term – and I know of a commodities trader that can help you do just that. In the last year, he has helped his readers make money in 29 of 32 trades in the volatile commodities market.

An investment adviser based in Hong Kong, he is a regular guest on CNBC, BBC World, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

The following is from a 1935 book by historian H.A.L. Fisher.

Fisher wrote, “Men wiser and more learned than I have discerned in history a plot, a rhythm, a predetermined pattern. These harmonies are concealed from me. I can see only one emergency following upon another…and only one safe rule for the historian: that he should recognize in the development of human destinies the play of the contingent and the unforeseen…The ground gained by one generation may be lost by the next.”

This generation of Americans is now losing ground financially. It owns less of its own houses. It has less in savings. It has less in pension benefits. What it has more of than any generation that came before it is wealth – there is simply more “stuff” around. And it has more credit, so it can use this “stuff” even without actually having the money in hand to buy it. And it has more debt – both personal and government.

Debt levels have gone way up. But “don’t worry about it,” say many economists. We’re richer now…we can afford it. Besides, the U.S. economy is less volatile. Today’s two-income families can bear more debt, because even if one of them loses his job, there is still one wage earner left to pay the bills. What’s more, the structure of the U.S. economy has changed, they say. When sales go down, as in a recession, factories lay off workers immediately. In the bad old days, the poor working stiffs stayed home and cut their spending. They needed savings to get through these tough times. And the last thing they wanted was a mortgage on the house; if they lost their jobs they might lose their houses, too. But all that has changed. Now, when sales begin to go down, buyers for Wal-Mart simply reduce their orders. So, it’s the Chinese who get laid off! In our brave new economy, we have managed to export our cyclical unemployment, say the cheerful economists. So, the two-income family doesn’t have anything to worry about. No one loses a job – ever. No spending ever needs to be cut. Nothing bad ever has to happen.

But there’s a crack in every bell God made. For the moment, wishful thinking seems to be paying off. Every wish seems to be coming true. If the American middle class really is getting poorer – losing ground that their parents won for them – they don’t seem to realize it.

The great empire is rolling over…but it is a long, slow process. It may be years before the average American realizes he has lost ground. Then again, it could happen tomorrow. In addition to the long imperial cycle, there are much shorter financial cycles. Stocks go up for 15-20 years for example, and then they go down. This market reminds us of the late ’60s, when stocks bounced around near their highs for years, and then collapsed. The bear market didn’t end until 1982. We also recall that back then people felt like they’d lost ground, even though the basic direction of the national economy was still positive.

More news from our team at The Rude Awakening…

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Eric Fry, reporting from Wall Street:

“Dr. Kurt’s insights and opinions are suitable for mature audiences only. The following material may contain scenes, depictions and descriptions of graphic macro-economic content that may be very disturbing…”

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Bill Bonner, back in Paris with more views…

*** “It would be a dramatic change in lifestyle for the suburbanites to look into the feasibility of moving in closer to their places of employment,” one reader writes in response to the question posed in the last weekend edition.

“There are lots of good buildings in the inner cities that have been vacatedin the past few years. These buildings could be converted into niceapartments.
“By solving the commuter problem the families would have more time together and nationwide could save millions of dollars on energy costs plus savings on automobile expenses.”

*** What worries us is the thought that even we have been caught up in a kind of bubble. We are investing heavily in property, at what appears to be near the top of the biggest worldwide property boom in history. “Yes, but we’re buying cheap property in cheap places,” we tell ourselves…which isn’t exactly true. We’re investing in property in France, for example.

“Are you kidding?” said a friend yesterday when we voiced these concerns. “The property you bought here has already gone up nicely. Before it was the English coming over. But they were buying small, cheap properties. Now the Dutch and Belgians are coming. They’ve got bigger budgets.”

Here at The Daily Reckoning, we are perfectly aware that prices go down as well as up. But our investment decisions don’t seem to be made by the conscious part of the rational brain. We buy property because we like it; we don’t care whether it goes up or not. But why do we like it? Isn’t it true that almost every piece of property we ever bought subsequently rose nicely? Deep down in our subconscious do we not expect that what we buy today will go up? Intellectually, we can imagine that it could go down, but emotionally, in the part of the brain that really matters, we wonder if it ever occurs to us?

At least, we do not buy on credit. If it goes down, we will take our losses in good grace. We hope we will not cry in public.

*** Gold went up again, not down. The proximate cause we trace to Ben “Printing Press” Bernanke’s elevation to Fed chairman. When Mr. Greenspan leaves in January, Mr. Bernanke will rise from the ranks of mere mortals and walk among the gods. He will be transubstantiated from an even-tempered economist who used to sit on a New Jersey school board, to the captain of the free world’s economic ship. He will preach the virtues of the “invisible hand,” saying that prices must be set by the market, not fiddled by central planners.

Meanwhile, as head of the U.S. Central Bank, he will apply his own greasy mitts to the world’s most important price: the Fed’s shortest term money rate. Will he press it down…or up? Down is our bet. Which makes our bet for gold still the same: up.

*** Saddam Hussein, former CIA asset, has turned into a liability for America’s occupying army. In court, the man is likely to ask some good questions: if I was so bad, why did the U.S. support me? If the U.S. has the right to kill insurgents, why didn’t I?

“My guess is that he will commit suicide,” said a cynical French friend last night. “You know…he’ll shoot himself in the head. Three times. Heh. Heh.”

*** Our son, Will, reports from Florida:

“We’re OK. But it’s a big mess. The office roof was damaged and we’ve got a lot of water damage…We probably won’t have power for a couple days. This storm was much stronger than anyone expected…But unfortunately not strong enough to take down our cottage which we want to demolish anyway…”

About Puru Saxena:

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. He also publishes a widely read economic report, Money Matters, which is available from www.purusaxena.com